Second-charge mortgages

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What is a second-charge mortgage?

A second-charge mortgage is a type of secured loan which uses the equity in your property as security. It's based on how much your house is worth minus what you still owe on your first mortgage.

It’s taken out in addition to the first mortgage you have on your home, but they’re completely separate from each other.

Second-charge mortgages can be used as an alternative to remortgaging or taking out a personal loan if you require a lump sum of cash, for instance to carry out renovations.

However, if you don't keep up with the repayments on a second mortgage, your home is at risk, so it’s worth considering all of the options available to you.

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How does getting a second-charge mortgage work?

Essentially, you’ll have two mortgages on one property that aren’t linked in any way. They could even be from different lenders.

The amount a mortgage lender is willing to lend for your second mortgage will depend on the Loan To Value ratio (LTV). This won't always be up to 100%. Most second charge lenders have different ways of defining the LTV criteria and this depend on different factors, such as credit score, affordability, first mortgage amount, debts and household outgoing. Your personal circumstances and employment status will also be considered. The loan amount will also be impacted by your age and the amount of loan you're applying for.

You’ll make two mortgage repayments each month, one for your first mortgage and one for your second mortgage.

It’s different to remortgaging, which is when you switch deals to get a better mortgage rate or to release equity in your property.

Why get a second-charge mortgage?

You may want to think about getting a second charge mortgage if:

Your current mortgage has hefty early repayment charges (ERC) for switching, so remortgaging isn’t an option
Your personal circumstances might mean you won't be considered for a personal loan, for example some cases if you are self-employed
Your credit rating isn’t good or your financial circumstances have changed, so if you remortgaged you wouldn’t be offered a competitive interest rate. By taking out a second mortgage, your interest rate might be higher
It could be used to consolidate debt like credit cards and personal loans. However, there is always a chance of putting your home at risk when taking out a loan

What if you move?

If you decide to move house, you’ll be required to pay off both mortgages in full, which could mean that you’re left with a very small deposit to put towards your next home.

Advantages

There are some pros to taking out a second mortgage over remortgaging:

If you have a particularly good deal on your first mortgage, you won’t lose it by taking out a second mortgage - however keep in mind that some first mortgage companies will have to provide permission for to the second mortgage lender before the second mortgage can be granted
You won’t have to pay any ERCs on your first mortgage
You can keep the same term on your first mortgage
If you choose a second mortgage that allows unlimited overpayments, you could pay off your second mortgage early to avoid being charged a lot of interest

Disadvantages

It isn’t a straightforward financial product, so here’s what you need to look out for:

Some first mortgage companies will have to provide permission for to the second mortgage lender before the second mortgage can be granted
You’ll usually be charged a higher interest rate on a second mortgage
Two mortgage payments per month can affect your finances
If you fail to keep up payments, it's more likely than not that the borrower will lose their home
Having two mortgages to pay off in full if you want to move house can leave very little for a deposit, so you may have to stay put for longer than you want to
It may make monthly payments more affordable but you could end up paying more overall

Alternatives to second mortgages

Before applying for a second mortgage, you may want to think about:

Remortgaging
Saving up
A personal loan

Things to consider before taking out a second-charge mortgage

Before taking out two mortgages, consider all the other options available.

Look at potential fees and charges and consider what would happen if you lost your job – how would you make two mortgage repayments per month?

Second mortgages are subject to the same affordability and financial checks as the first mortgages. As a borrower you should consider tidying up your finances, checking for unwanted subscriptions, making sure payments are up to date and check your credit score similar way you would do when applying for your first mortgage.

If you have any doubt, speak to an independent financial adviser to see whether it’s the right option for you.

Frequently asked questions

Is a second-charge mortgage a good idea?

This will depend on your financial circumstances. If you’re struggling to make your first mortgage repayments or aren’t sure you’d be able to comfortably pay off two mortgages simultaneously, don’t do it! You need to consider your income level, your first mortgage payments and other household expenditure as well.

Consider other options and speak to a financial adviser who can help you reach the right decision. It may be a case of saving up to fund your home improvements, which may be irritating if you want to do them now but will stop you from being put under financial stress.

Are second-charge mortgages expensive?

They tend to have a higher interest rate than first mortgages, so they can be expensive and cost you more overall than remortgaging. This is because if you fall behind on your payments and your home is repossessed, your first mortgage lender will be paid before your second mortgage lender, so you’re viewed as more of a risk.

It’s worth noting that a second mortgage may be a cheaper way to borrow than a personal loan, depending on your circumstances.